5 questions for Dr. Gertrud R. Traud, Landesbank Hessen-Thüringen
Christian Walburg
Association of German Pfandbrief Banks
Germany has fallen into a deep recession in 2020 as a result of the Corona Pandemic. When will things get better again, Dr. Traud?
Dr. Gertrud R. Traud
Landesbank Hessen-Thüringen
As a result of the containment measures taken in spring this year, the German economy experienced a historic slump in the second quarter. But there was already a strong countermovement in the third quarter. I am optimistic for 2021. It is true that “lockdown light” will interrupt the recovery process for the time being at the turn of the year. In 2021, however, there will be a strong expansion of economic activity – provided that the vaccines that have been successfully developed in the meantime can soon be used. This will bring about a considerable improvement of the overall mood in the economy. For 2021 as a whole, I expect economic growth of 5 % in real terms, so that by the end of 2021, perhaps pre-crisis levels may even be exceeded.
Christian Walburg
Association of German Pfandbrief Banks
Will we soon see positive interest rates again as the economy recovers?
Dr. Gertrud R. Traud
Landesbank Hessen-Thüringen
Unfortunately, I have to disappoint all savers and bond market investors. Despite the expected economic recovery, significantly higher inflation and the drastic increase in government debt, the interest rate on 10-year German government bonds will probably remain in negative territory in 2021. This is mainly due to central banks and their still extremely expansive monetary policy stance. I therefore expect only a very slight rise in yields. At the end of 2021, 10-year Bunds are likely to yield -0.2 %.
Christian Walburg
Association of German Pfandbrief Banks
The expansive monetary policy is also having an impact on the market for Pfandbriefe. What are your expectations for 2021?
Dr. Gertrud R. Traud
Landesbank Hessen-Thüringen
The European System of Central Banks‘ already high stock of Pfandbriefe will continue to grow. As a result, fewer and fewer bonds are available to investors, and this will continue to weigh on the segment’s liquidity in the future. However, central banks’ stable purchases continue to support risk premiums. We even see slight potential for Pfandbrief spreads to tighten further. This is supported by the expected issuance, which should again be below maturities. Favorable current refinancing options for banks at the ECB will also have an impact here and possibly in the future, too.
Christian Walburg
Association of German Pfandbrief Banks
The year just ended has also changed the EU. What impact does this have on the Pfandbrief?
Dr. Gertrud R. Traud
Landesbank Hessen-Thüringen
2021 marks the beginning of a new era for the EU. Following the departure of the United Kingdom, the remaining 27 EU states will face major challenges in terms of economic growth, job security and the strengthening of their health systems. The EU has fully addressed these challenges and intends to strengthen the economies of the EU countries with the “Next Generation EU” development plan worth EUR 750 billion. The EU will become the fifth largest debtor in Europe and EU bonds will shape fixed income markets for years to come. The ECB will continue to make strong use of its purchasing programs. The share of covered bonds and thus also of Pfandbriefe is likely to decline rather slightly due to the focus of the ECB’s purchasing programs on the public sector. I do not see that EU bonds could reduce demand for Pfandbriefe and even lead to a rise in risk premia. After the first EU bonds were issued, spreads have already tightened considerably. For bank investors, the significant spread discount to Pfandbriefe should compensate for the preferential treatment of EU bonds in meeting regulatory capital and liquidity requirements.
Christian Walburg
Association of German Pfandbrief Banks
With the Green Deal, the EU has launched a new action plan. What do you see as the connecting point for the Pfandbrief?
Dr. Gertrud R. Traud
Landesbank Hessen-Thüringen
First of all: sustainability is and will remain a megatrend – also in our research.
Sustainable investment opportunities are in such big demand that supply can hardly keep up. Social change is contributing to this. Major impetus is already coming from the international sphere. With the European “Green Deal” a new dynamic is coming into play. The “Green Deal” involves all sectors of the economy and is regarded as a new growth strategy for the EU – with very ambitious goals. It was to be expected that the building sector would be an important area of action, as it accounts for 30-40% of energy consumption, depending on statistics. It is not unproblematic for the real estate sector that it is generally easier to incorporate ecological aspects into the planning of a new building at an early stage than to renovate existing buildings to improve their energy efficiency. In view of the highly utilized capacities in the construction industry, rapid developments in the building stock are therefore not very realistic. Therefore, substantial progress in the granular residential property market is an ambitious goal. The Green Deal should now enable obstacles in the building and construction sector to be addressed more decisively. Green building certificates are already widely used for commercial properties. But now to the investor side: The banking sector plays a major role in financing sustainable projects. This is reflected in the increase in green loans and green bonds, among other things. Growth in the Green Pfandbrief market is also foreseeable, even if it will take some time before the “green” sub-cover pools grow more strongly and until more banks have completed the high level of effort required for the preparation process leading up to the issue of a Green Pfandbrief.